Interchange Fees Explained

What are interchange fees?

Interchange fees are fees merchants pay to issuing banks to cover the costs of issuing cards and processing card transactions. Every time a customer makes a purchase with a credit or debit card, the organization’s acquiring bank is required to pay the interchange fee to the cardholder’s issuing bank. The organization pays back the interchange fee as part of its card processing fees. Interchange fees are set by payment card brands and usually account for the largest portion of overall card fees. The pricing structure of interchange fees is determined by a number of factors, such as:

• The type of card (credit or debit)
• The card brand
• Regions or jurisdictions
• The type and size of the merchant
• The type of transaction (e.g., in-store, online, phone order)

Interchange fees compensate issuing banks for providing and maintaining payment cards and managing risks associated with processing payments. They also help pay for costs associated with network infrastructure and fraud prevention measures. Additionally, interchange fees often help fund customer rewards programs.

How much are interchange fees?

Because interchange fees are set by the card brand, the amount varies. Credit card fees are typically higher, and while there may be a fixed amount involved, the interchange fee is usually a percentage of the card transaction itself. 

In the U.S., the average credit card interchange fee is close to 2% of the transaction value, according to WalletHub. In the EU, interchange fees are capped at 0.3%.

Following the 2011 passage of the Durbin Amendment, debit card interchange fees in the U.S. are capped at $0.21 plus 0.05% of the transaction value. In the EU, they are capped at 0.2%.

Interchange fees are regularly adjusted — typically twice a year, in April and October — so the most accurate way to find current rates is usually to check the card network’s website.

How are interchange fees calculated?

While there may be a fixed amount involved, the interchange fee is typically a percentage of the card transaction itself. The interchange fee amount varies depending on several factors, including:

• Type of card: Credit cards usually have higher interchange fees than debit cards. Furthermore, rewards cards typically have higher interchange fees than standard cards, as interchange fees are often used to fund rewards programs.
• Card-present vs. card-not-present: Card-present transactions, in which the cardholder presents the card at the point of sale, usually have lower interchange fees than card-not-present transactions, such as online or over-the-phone payments. This is because the latter has an increased risk of fraud and data errors.
• Merchant category code (MCC): Every merchant has an MCC that corresponds to its business type. Interchange fees vary based on the MCC, which reflects the level of risk and average transaction size of the business type.

How do interchange fees work?

Every time a purchase is made with a credit or debit card, interchange fees are involved. Below is a basic overview of how interchange fees work.

1.) A cardholder makes a purchase using a credit or debit card.

2.) The transaction information is sent from the merchant’s payment processor to the acquiring bank. 

3.) From there, it’s sent to the card network, which passes on the information to the issuing bank.

4.) The issuing bank evaluates the transaction based on the amount of funds in the cardholder’s account, the cardholder’s credit limit and fraud detection protocols.

5.) If the issuing bank confirms that the cardholder has enough funds or credit available, it sends authorization for the transaction through the card network to the acquiring bank, which passes it on to the organization.

6.) The acquiring bank sends the authorized transaction to the card networks for settlement. This typically occurs in batches at the end of the business day.

7.) The card network routes the authorized transaction to the issuing bank and debits the transaction amount from the issuing bank’s account.

8.) The card network transfers the transaction amount, minus the interchange fee, to the merchant’s payment processor.

9.) The payment processor transfers the remaining amount, minus any additional fees for payment processing, to the acquiring bank.

10.) The acquiring bank deposits the funds, minus an acquiring fee, into the merchant’s account. Source